Police and Fire Retirement System of the City of Detroit · Report on Summarized Comparative Information We have previously audited the Police and Fire Retirement System of the City

Police and Fire Retirement Systemof the City of Detroit

Financial Report

with Supplemental Information

June 30, 2018

Police and Fire Retirement System of the City of Detroit

Contents

Independent Auditor's Report 1-2

Management's Discussion and Analysis 3-9

Basic Financial Statements

Statement of Fiduciary Net Position 10

Statement of Changes in Fiduciary Net Position 11

Notes to Financial Statements 12-32

Required Supplemental Information 33

Schedule of Changes in the City's Net Pension Liability and Related Ratios (Legacy Plan) 34

Schedule of Investment Returns (Legacy and Hybrid Plans) 35

Schedule of City Contributions (Legacy Plan) 36

Schedule of Changes in the City's Net Pension Liability (Asset) and Related Ratios (HybridPlan) 37

Notes to Required Supplemental Information Schedules 38

Independent Auditor's Report

To the Board of TrusteesPolice and Fire Retirement System of the City of Detroit

Report on the Financial Statements

We have audited the accompanying financial statements of the Police and Fire Retirement System of the City ofDetroit (the "System") as of and for the year ended June 30, 2018 and the related notes to the financialstatements, which collectively comprise the Police and Fire Retirement System of the City of Detroit's basicfinancial statements, as listed in the table of contents.

Management’s Responsibility for the Financial Statements

Management is responsible for the preparation and fair presentation of these financial statements in accordancewith accounting principles generally accepted in the United States of America; this includes the design,implementation, and maintenance of internal control relevant to the preparation and fair presentation of financialstatements that are free from material misstatement, whether due to fraud or error.

Auditor’s Responsibility

Our responsibility is to express an opinion on these financial statements based on our audit. We conducted ouraudit in accordance with auditing standards generally accepted in the United States of America. Those standardsrequire that we plan and perform the audit to obtain reasonable assurance about whether the financial statementsare free from material misstatement.

An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in thefinancial statements. The procedures selected depend on the auditor’s judgment, including the assessment of therisks of material misstatement of the financial statements, whether due to fraud or error. In making those riskassessments, the auditor considers internal control relevant to the entity’s preparation and fair presentation of thefinancial statements in order to design audit procedures that are appropriate in the circumstances, but not for thepurpose of expressing an opinion on the effectiveness of the entity’s internal control. Accordingly, we express nosuch opinion. An audit also includes evaluating the appropriateness of accounting policies used and thereasonableness of significant accounting estimates made by management, as well as evaluating the overallpresentation of the financial statements.

We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our auditopinion.

Opinion

In our opinion, the financial statements referred to above present fairly, in all material respects, the fiduciary netposition of the Police and Fire Retirement System of the City of Detroit as of June 30, 2018 and the changes in itsfiduciary net position for the year then ended in accordance with accounting principles generally accepted in theUnited States of America.

1

Kim.Partlo

Southfield

Kim.Partlo

Praxity

To the Board of TrusteesPolice and Fire Retirement System of the City of Detroit

Other Matters

Required Supplemental Information

Accounting principles generally accepted in the United States of America require that the management'sdiscussion and analysis and other required supplemental information, as identified in the table of contents, bepresented to supplement the basic financial statements. Such information, although not a part of the basicfinancial statements, is required by the Governmental Accounting Standards Board, which considers it to be anessential part of financial reporting for placing the basic financial statements in an appropriate operational,economic, or historical context. We have applied certain limited procedures to the required supplementalinformation in accordance with auditing standards generally accepted in the United States of America, whichconsisted of inquiries of management about the methods of preparing the information and comparing theinformation for consistency with management's responses to our inquiries, the basic financial statements, andother knowledge we obtained during our audit of the basic financial statements. We do not express an opinion orprovide any assurance on the information because the limited procedures do not provide us with sufficientevidence to express an opinion or provide any assurance.

Report on Summarized Comparative Information

We have previously audited the Police and Fire Retirement System of the City of Detroit's June 30, 2017 financialstatements, and we expressed an unmodified audit opinion on those audited financial statements in our reportdated December 4, 2017. In our opinion, the summarized comparative information presented herein as of and forthe year ended June 30, 2017 is consistent, in all material respects, with the audited financial statements fromwhich it has been derived.

November 26, 2018

2


Management's Discussion and Analysis

Using this Annual Report

This annual report consists of three parts: (1) management’s discussion and analysis (this section), (2) the basicfinancial statements, and (3) the required supplemental information. The financial statements also include notesthat explain some of the information in the financial statements and provide more detailed data. The financialstatements are followed by sections of required supplemental information that further explain and support theinformation in the financial statements.

Condensed Financial Information

The table below compares key financial information in a condensed format between the current year and the prioryear:

2018 2017

Assets $ 3,344,199,389 $ 3,319,639,018

Liabilities 345,285,735 299,820,395

Fiduciary Net Position Restricted for Pensions $ 2,998,913,654 $ 3,019,818,623

AdditionsNet investment income $ 244,318,898 $ 288,289,217Securities lending income:

Income 1,942,678 1,666,383

Net gain on collateral pool 397,791 1,429,056

Total securities lending income 2,340,469 3,095,439

Contributions:Employer 19,274,356 19,633,772Employee 9,212,990 8,603,082

Foundation contributions 18,300,000 18,300,000

Total contributions 46,787,346 46,536,854

Other income 1,525,944 1,500,667

Total additions 294,972,657 339,422,177

DeductionsRetirees' pension and annuity benefits 288,851,671 286,867,526Member refunds and withdrawals 20,163,415 19,518,004

Other expenses 6,862,540 7,081,690

Total deductions 315,877,626 313,467,220

Net (Decrease) Increase in Fiduciary Net Position Restricted for Pensions $ (20,904,969) $ 25,954,957

Fund Overview, Membership, and Governance

The Police and Fire Retirement System of the City of Detroit (DPFRS or the “System”) is a defined benefit pensionplan with a defined contribution element, which, as discussed in greater detail below, was frozen by the City ofDetroit, Michigan (the “City”) at the conclusion of the 2014 fiscal year. This existing plan, the legacy plan (the“Legacy Plan”), is also referred to as “Component II.” A new pension plan (the “Hybrid Plan,” also referred to asComponent I) was created by the City for its uniformed employees on July 1, 2014. Both the Legacy Plan andHybrid Plan are being reported in these financial statements.

DPFRS exists to pay benefits to its active members, retirees, and beneficiaries. Active members earn servicecredit that entitles them to receive benefits in the future. Both the employer and municipal plan sponsor for theSystem, the City, and active members have historically contributed to the System. Retirees, beneficiaries, anddisabled members are those currently receiving benefits.

3


Management's Discussion and Analysis (Continued)

Component I of DPFRS is a newly created plan (effective July 1, 2014), with more active members earning servicecredit than members eligible to receive or receiving benefits. As of June 30, 2017, there were 2,604 activemembers, with 64 retirees and 465 terminated plan members entitled to but not yet receiving benefits.

Component II of DPFRS is a relatively mature plan in that there are more retirees and beneficiaries receivingcurrent benefits than active members. Membership of the System at June 30, 2017 consisted of 2,597 activemembers with 8,187 inactive members receiving benefits and 424 terminated plan members entitled to but not yetreceiving benefits. On June 30, 2014, the emergency manager of the City of Detroit, Michigan issued Order No.29, which froze the existing pension plan, the Legacy Plan. As of June 30, 2014, no new employees were allowedto participate in the Legacy Plan, and benefit accruals for members with respect to service rendered prior to July 1,2014 were frozen based on the members’ years of service, average final compensation, and the pension multiplierformula as of the freeze date. Employees working after July 1, 2014 are now earning service credit in the HybridPlan.

On July 1, 2014, the City first published a document entitled The Combined Plan for The Police and FireRetirement System of the City of Detroit, Michigan (the “Combined Plan”). On October 19, 2014, the emergencymanager issued Order No. 43, which amended and restated the Combined Plan. Before leaving office onDecember 8, 2014, the emergency manager issued Order No. 44, which again amended and restated theCombined Plan. According to Order No. 44, the latest amendments and restatements to the Combined Plan madechanges related to collective bargaining agreements, conformed the Combined Plan terms to the requirements ofthe City of Detroit, Michigan’s bankruptcy plan, and made clarifying modifications. The Combined Plan is availableat DPFRS’ website, www.pfrsdetroit.org.

On October 19, 2014, the emergency manager issued Order No. 43, which amended and restated the CombinedPlan. On December 8, 2014, before leaving office, the emergency manager issued Order No. 44, which againamended and restated the Combined Plan. According to Order No. 44, the latest amendments and restatementsto the Combined Plan conformed the Combined Plan terms to the requirements of the City’s bankruptcy plan, andmade clarifying modifications. The Combined Plan is available at DGRS’s website, www.rscd.org.

DPFRS governance was modified in December 2014 as part of the City of Detroit, Michigan’s bankruptcy plan.DPFRS is governed by a board of trustees comprised of 17 seats, though as of June 30, 2017, there were 15seats occupied (the “Board”), and while DPFRS’ investment management is now the ultimate responsibility of anine-member investment committee (the “Investment Committee”), the Board maintains its role as the governingboard vested with responsibility for the general administration, management, and operation of the System, withwhich the Investment Committee assists, pursuant to Michigan law.

The Board is composed of six members elected by the active membership to serve three-year terms. Expirationsof terms of elected trustees are staggered. Two retired members are elected by the retired membership and servethree-year terms. Eight members serve ex-officio, these members being the mayor of the City of Detroit, Michigan(or designee), the city treasurer (or deputy treasurer), one representative from the Detroit City Council, theCorporation Counsel (or designee), the finance director (or designee), the budget director (or designee), and twoex-officio trustees to be appointed by the mayor. A 17th trustee, who is not a participant of the plan and is notemployed by the City, may be selected to serve two years by the board of trustees.

The Investment Committee has five independent members appointed to initial terms with staggered expirations,which terms will all eventually become six years. Four additional members, two active and two retired, serve on theInvestment Committee based on appointment by the Board. The Investment Committee will be in place through atleast December 2034.

The City of Detroit, Michigan’s Chapter 9 Bankruptcy Case, the Plan of Adjustment, and Implementation

In March 2013, after the City had endured years of financial difficulty, the governor appointed an emergencymanager for the City pursuant to Michigan Public Act 436 of 2012 (PA 436), which is a law that includes the abilityfor an emergency manager to file a bankruptcy proceeding. In anticipation of that possibility, DPFRS hadassembled a restructuring team of professional legal, financial, actuarial, and other advisors to assist the System’son-staff professionals with meeting the unknown challenges that could arise if the City filed for bankruptcyprotection.

4



On July 18, 2013, the City filed a petition in the United States Bankruptcy Court for the Eastern District of Michigan(the “Bankruptcy Court”) seeking protection from its creditors under Chapter 9 of the United States BankruptcyCode (the “Chapter 9 Case”). DPFRS, one of the City’s largest creditors because of its duty to collect employercontributions from the City and the City’s delinquency in making required employer contributions as of fiscal year2013, objected to the City’s request for Chapter 9 relief on the basis that Article IX, Section 24 of the MichiganConstitution of 1963 prevented the City from diminishing accrued pension benefits, even in bankruptcy. OnDecember 5, 2013, after a hearing lasting several weeks, the Bankruptcy Court entered an order determining thatthe City was eligible for Chapter 9 relief and holding that accrued pension benefits could be impaired in bankruptcydespite the language of the Michigan Constitution. DPFRS immediately filed an appeal with the United StatesCourt of Appeals for the Sixth Circuit.

The Bankruptcy Court also ordered DPFRS and other creditors to mediate their disputes with the City, a processthat gained momentum in early 2014. As a result of court-ordered mediation, DPFRS supported a proposedsettlement of DPFRS member pension claims, which was memorialized in the City’s Fourth Amended Plan for theAdjustment of Debts of the City of Detroit, filed on May 5, 2014 along with an accompanying Fourth AmendedDisclosure Statement (the “Pension Settlement”). On May 12, 2014, the City issued ballots to all DPFRS membersas claim holders in Class 10 under the City’s classification system for its creditors, seeking their approval of thePension Settlement. On June 19, 2014, the Board adopted a resolution supporting treatment of the DPFRS Class10 claim holders as part of the Pension Settlement. DPFRS thereafter issued correspondence to its membershipin support of the treatment of Class 10 claims. Also in June 2014, the Michigan legislature adopted legislation,which the governor signed, conditionally approving the State’s contribution of $194.8 million, split between DPFRSand the General System of the City of Detroit, to the resolution of the Chapter 9 Case.

The Pension Settlement’s terms were carried forward to the Eighth Amended Plan for Adjustment of Debts of theCity of Detroit (the “Plan of Adjustment”), filed with the Bankruptcy Court on October 22, 2014. In November 2014,after a confirmation hearing lasting several weeks, the Bankruptcy Court confirmed the Plan of Adjustment, whichbecame effective on December 10, 2014.

The Pension Settlement, as part of the Plan of Adjustment, compromised pension claims and provided support forDPFRS legacy benefit obligations with funding support from the State of Michigan and certain charitablefoundations in connection with the Detroit Institute of Arts, and included governance changes for DPFRS. Thosegovernance changes included establishment of the Investment Committee effective December 10, 2014, whichofficially marked the beginning of implementation of the Plan of Adjustment, though DPFRS had for monthsalready undertaken contingency planning for all of the pension adjustments.

For DPFRS, with respect to Chapter 9 Case benefit adjustments, the Pension Settlement (for which benefit levelswere and are contingent on other factors, including receipt of outside contributions), did not reduce DPFRS LegacyPlan pension benefits, but provided for a 55 percent reduction in cost of living adjustments, or “escalators”(COLAs), paid after June 30, 2014. The Plan of Adjustment also includes the possibility of restoration of certainpension benefit cuts based on a program for the most financially vulnerable pensioners and beneficiaries throughthe State of Michigan Treasury Department, as well as a new feature of the Legacy Plan allowing restorationdepending on the System’s funding level over time.

Other components of implementation of the Plan of Adjustment proceeded between December 2014 and March2015, and included dismissal of related litigation proceedings, including DPFRS’ appeal of the Bankruptcy Court’seligibility determination in the United States Court of Appeals for the Sixth Circuit. The process of implementing thePlan of Adjustment is expected to continue through 2016 and beyond, with monitoring, compliance, and otheractivity by DPFRS, its board of trustees, and its Investment Committee. On December 1, 2014, DPFRS providedits retirees and beneficiary members with applications for the Income Stabilization Program (the “ISF Program”)established as part of the State Contribution Agreement, another facet of the Pension Settlement. The ISFProgram, supported by city funds arising from an unlimited tax general obligation bonds settlement, is intended toensure that the most financially vulnerable retirees and beneficiaries do not fall below the poverty line as a result ofbankruptcy-related pension changes. The ISF Program was implemented on March 1, 2015, along with otherbankruptcy-related pension benefit changes.

5



As of March 1, 2015, less than three months after the effective date of the Plan of Adjustment, DPFRSsuccessfully implemented the vast majority of benefit changes required by the Plan. In fiscal year 2017, DPFRScontinued to implement the Plan of Adjustment, which includes ongoing compliance and meeting additionalperiodic and interim reporting requirements by the Board and the Investment Committee to the City, theFoundation for Detroit’s Future, and the State of Michigan, annual review of benefit levels, and essentially providesfor a 40-year plan to close the DPFRS underfunded Legacy Plan liability. DPFRS met its obligations in fiscal years2016 and 2017 concerning implementation of the Plan of Adjustment, and continued compliance in the fiscal year2018.

Contributions to the System

Historically, both the City and active employees have made regular contributions to the System. Basic pension anddisability benefits have been funded through employer and employee contributions plus investment earnings onthose contributions. The required employer contributions have been determined by the System’s actuaries usingthe entry age normal cost method. Assumptions used by the actuaries are subject to experience testing every fiveyears. Effective December 10, 2014, as part of the resolution of the Chapter 9 Case, the investment returnassumption and discount rate used by the System’s actuary for the purpose of determining the System’s assetsand liabilities for funding purposes was fixed at 6.75 percent through the period ending June 30, 2023.

Prior to the filing of the Chapter 9 Case, the City stopped making payments related to unsecured funded debt andlegacy liabilities, including payments to the System. When the City filed the Chapter 9 Case, obligations owed bythe City became potentially subject to compromise in the bankruptcy process. The pension claims of DPFRSmembers were determined by the Bankruptcy Court to be included as unsecured obligations. The City’s lastemployer contribution before the Chapter 9 Case was made on December 28, 2012. During fiscal year 2014, theCity did not make any contributions to the System. In the Chapter 9 Case, DPFRS filed a claim against the City for$72.6 million as of July 18, 2013, reflecting past-due employer contributions with interest for fiscal years 2012 and2013. This amount did not reflect the full unfunded actuarial accrued liability of the System.

Going forward, the obligations for contributions to the System through 2023 are determined as fixed amountspursuant to the provisions in the Plan of Adjustment. Pursuant to the Plan of Adjustment, the System wasexpected to receive contributions totaling $260.7 million, including $96.0 million from the State of Michigan and atleast the present value equivalent of $164.7 million from the foundation donors, over a 10-year period coveringfiscal year 2015 through fiscal year 2023, as well as at least the present value of $50 million over a 10-year periodending in 2034. The City will retain responsibility for the full funding obligations of the System after 2023,consistent with Michigan law.

The Plan of Adjustment allows for certain of the funding obligations to DPFRS through 2034 to be met byprepayment of the present value equivalent using a discount rate of 6.75 percent. In the fiscal year ended June 30,2016, a portion of the DIA obligation to make annual $5 million contributions over 10 years ending in 2034 wasprepaid. This present value prepayment resulted in DPFRS receiving $19,487,744 on June 30, 2016 from the DIA,which represents the present value, using a 6.75 percent discount rate, of $4,650,000 per year for 10 years endingin 2034. DPFRS still expects to receive the equivalent or actual remaining $375,000 per year from the DIA for that10-year period from 2025 to 2034.

Impact of City of Detroit Collective Bargaining and Bankruptcy Pension Adjustments

As further noted below, depending on bargaining unit, the following changes became effective with EM Order No.29:

The Legacy Plan obligations, or the existing defined contribution plan and defined benefit plan, were frozen as

of June 30, 2014, as referenced above.

As of July 1, 2014, a new defined benefit plan commenced with mandatory contributions as part of the new

Hybrid Plan. Members hired on June 30, 2014 or before contribute 6 percent of base compensation, and all

employees hired on or after July 1, 2014 will contribute 8 percent of base compensation.

6



As of July 1, 2014, a new defined contribution plan became optional for the annuity savings fund in the new

Hybrid Plan. Employees may make voluntary Annuity Savings Fund contributions up to 10 percent of total after-

tax pay. Interest will be credited at the actual net investment rate of return of DPFRS, but will in no event be

lower than 0 percent or higher than 5.25 percent.

In the Legacy Plan, active employees historically made a mandatory contribution of 5 percent of pay toward theirdefined contribution benefits (annuity savings fund) until the date at which they are eligible for retirement. Theseemployee contributions are maintained in separate accounts in the defined contribution plan solely for the benefitof the contributing employee. Before the Legacy Plan was frozen, employee annuity savings fund accounts werecredited with investment earnings equal to the rate of return earned by the System subject to minimum earnings of0 percent. An active employee is allowed in the Legacy Plan to withdraw his or her accumulated contributions inthe annuity savings fund plus investment earnings once he or she is eligible for retirement or upon completion of25 years of service (DPOA and fire equivalents may do so at 20 years, consistent with new collective bargainingagreements entered in 2014).

Following the freeze of the Legacy Plan, no member was allowed to make contributions into the annuity savingsfund of the Legacy Plan with respect to payroll dates occurring on or after August 1, 2014. Mandatory employeecontributions of 6 percent of pay after that date support the defined benefits allowed as part of the new HybridPlan.

In the new Hybrid Plan, effective July 1, 2014 and beginning with payroll on or after August 1, 2014, activeemployees were allowed to make voluntary contributions to a new annuity savings fund account of up to 10percent of total after-tax pay. Interest will be credited to those accounts at the actual net investment rate of returnfor DPFRS, but will not be lower than 0 percent or more than 5.25 percent. No in-service withdrawals arepermitted from the Hybrid Plan annuity savings fund accounts.

In the Hybrid Plan, employer contributions by the City are allocated according to bargaining unit and the respectivecollective bargaining agreement (CBA). For Detroit Fire Fighter Association employees, the City will contribute11.2 percent of base compensation prior to the effective date of the CBA and 12.25 percent after the effective dateof the CBA. For Detroit Police Command Officers Association employees, the City will contribute 12.25 percent ofbase compensation. For Detroit Police Officers Association employees, the City will contribute 11.2 percent ofbase compensation prior to the effective date of the CBA and 12.25 percent after the effective date of the CBA.For Detroit Police Lieutenants and Sergeants Association employees, 12.25 percent of base compensation will becontributed by the City. For all of these employees, a portion of these contributions will be contributed to a ratestabilization fund, as determined by the City.

Additionally, as noted above, as a result of the Chapter 9 Case, cost of living adjustments made to annual pensionbenefits to account for the effects of inflation (COLA) in the Legacy Plan from and after June 30, 2014 werereduced to 45 percent of the COLAs provided for in police and fire collective bargaining agreements, othercontracts, or ordinances. These adjustments were implemented with pension payments made on and after March1, 2015. Base benefits for DPFRS member benefits accrued through June 30, 2014 were not subject to any cutsin resolution of the Chapter 9 Case.

Beginning on March 1, 2015, certain DPFRS members also received benefit pension cut restoration under theIncome Stabilization Fund program administered by DPFRS pursuant to the State Contribution Agreement basedon eligibility and benefit payments calculated by the State of Michigan.

Note 10 to the financial statements for the fiscal year ended June 30, 2014 discusses, in further detail, thechanges resulting from the Plan of Adjustment.

7



Benefit Payments

The System exists to pay the benefits that its members have earned pursuant to benefits promised by the City,subject to the Chapter 9 Case benefit adjustments going forward in the Legacy Plan and the new promises in theHybrid Plan. Benefits are paid monthly. In fiscal year 2018, DPFRS paid out $309 million in benefits, consisting of$288.9 million in benefits to retirees and beneficiaries plus $20.2 million in refunds of annuity savings fundbalances. This represents approximately 10.3 percent of the net position of the System as of June 30, 2018.Employer and employee contributions were approximately $46.8 million, or 1.6 percent, of the net position of theSystem. The excess of benefits over contributions is funded through investment income. The public capitalmarkets represent the primary source of opportunities to earn investment income.

As of June 30, 2014, due to the freeze for the Legacy Plan, no additional benefit accruals are being earned in theLegacy Plan.

Asset Allocation

The Board and Investment Committee believe that the principal determinant of total fund investment performanceover long periods of time is asset allocation. The DPFRS asset allocation is built upon the foundation that theobligations of DPFRS to pay the benefits promised to its members are very long-term obligations. Accordingly, theBoard and Investment Committee must make investment decisions that it believes will be the most beneficial tothe System over many years, not just one or two years.

DPFRS has established asset allocation policies that are expected to deliver more than enough investmentincome over a very long period of time to satisfy the obligations to pay the benefits promised to the members ofthe System. The following is a summary of the System’s target asset allocation policy as of June 30, 2018:

Asset Class Target Allocation

Global equity %38.00Global fixed income 28.00Real estate 13.00Private equity 10.00Hedge funds 5.00MLPs 5.00Cash 1.00

DPFRS asset allocation policies comply with Michigan law.

Investment Results

DPFRS calculates investment results on a time weighted Global Investment Performance Standard (GIPS) basis,unless explicitly stated otherwise. All returns for periods of one year or greater have been annualized.

Total Fund Composite

DPFRS’ total fund composite return for the year was 8.2 percent, net of fees and expenses using a time-weightedmethodology. The three-year and five-year annualized total fund returns were 7.2 percent and 8.6 percent,respectively, net of fees and expenses.

DPFRS’ well-diversified, global portfolio performed well across most asset classes. Despite a series of unexpectedevents during the fiscal year, volatility in the equity markets remained subdued, and the strong performancegenerated by a typical well-diversified portfolio was largely driven by robust global equity returns. InternationalEquities led the way with a total return in excess of 14 percent for the fiscal year.

As part of the resolution of the City of Detroit, Michigan’s Chapter 9 Bankruptcy Case, the discount rateassumption used to meet current and future benefit obligations was set at 6.75 percent through the period endingJune 30, 2023. This discount rate assumption provided in the Chapter 9 Case does not purport to establish aninvestment return assumption or discount rate for purposes of, or in accordance with, generally acceptedaccounting principles. Although the fund’s return for this year fell below this assumption, the fund’s longer-termreturn expectation, which this assumption is intended to characterize, still exceeds this assumption.

8



Total plan returns, net of fees and expenses, for the recent prior fiscal years ended June 30 are shown below:

2017 12.0% 2016 2.6% 2015 3.4% 2014 18.4% 2013 9.7% 2012 (1.5)% 2011 13.8% Money Weighted Rate of Return

GASB Statement No. 67 requires the disclosure of the annual money-weighted rate of return. A money-weightedrate of return (as opposed to the time-weighted rate of return discussed in the previous section) considers both thesize and timing of cash flows over the course of the year to determine an internal rate of return (sometimesreferred to as an “IRR”). This return is calculated net of expenses and uses cash flows determined on a monthlybasis. The DPFRS money-weighted rate of return for the year using end-of-the-month cash flows was 8.2 percent.

Requests for Further Information

This financial report is intended to provide a general overview of the System’s finances and investment results inrelation to actuarial projections. It shows the System’s accountability for the money it receives from employer andemployee contributions. If you have questions about this report or need additional information, we welcome you tocontact the System’s office or visit its website at www.pfrsdetroit.org or www.rscd.org.

9


Statement of Fiduciary Net Position

June 30, 2018

Component II Plan (Legacy)Component IPlan (Hybrid)

Defined BenefitFund

IncomeStabilization

FundDefined Benefit

FundTotal Combined

Plan

AssetsCash and cash equivalents (Note 3) $ 57,033,964 $ 260,219 $ 16,361,957 $ 73,656,140Investments: (Notes 3 and 4)

Global equities 1,426,303,608 2,224,429 54,424,352 1,482,952,389Global fixed income 596,551,639 930,368 22,763,000 620,245,007Real assets 460,294,117 717,864 17,563,729 478,575,710Private equity 153,374,279 239,199 5,852,399 159,465,877Diversifying strategies 170,742,398 266,286 6,515,125 177,523,809

Receivables:Accrued interest receivable 6,166,500 9,617 235,299 6,411,416Contributions (Note 1) - - 4,220,826 4,220,826Other accounts receivable 35,630 - - 35,630Notes receivable from participants 6,360,470 - - 6,360,470Receivables from investment sales 85,624,465 133,538 3,267,227 89,025,230

Prepaid expenses and other assets 128,266 200 4,895 133,361Cash and investments held as collateral for

securities lending: (Note 3)Asset-backed securities 24,228,043 37,785 924,484 25,190,312Repurchase agreements 40,307,416 62,862 1,538,035 41,908,313U.S. corporate floating rate 170,856,680 266,464 6,519,484 177,642,628

Capital assets - Net (Note 1) 551,830 - 300,441 852,271

Total assets 3,198,559,305 5,148,831 140,491,253 3,344,199,389

LiabilitiesClaims payable to retirees and beneficiaries 699,877 - 3,108 702,985Payables for investment purchases 92,477,921 144,227 3,528,737 96,150,885Due to City of Detroit, Michigan 1,381,128 - - 1,381,128Amounts due broker under securities lending

arrangements (Note 3) 232,885,808 363,203 8,886,368 242,135,379

Other liabilities 4,810,766 2,938 101,654 4,915,358

Total liabilities 332,255,500 510,368 12,519,867 345,285,735

Net Position - Restricted for pensions $ 2,866,303,805 $ 4,638,463 $ 127,971,386 $ 2,998,913,654

See notes to financial statements. 10


Statement of Changes in Fiduciary Net Position

Year Ended June 30, 2018(with comparative totals for the year ended June 30, 2017)

Component II Plan (Legacy)Component IPlan (Hybrid)

Defined BenefitFund

IncomeStabilization

FundDefined Benefit

FundTotal Combined

Plan 2018 2017

AdditionsInvestment income:

Interest and dividends $ 71,726,625 $ 104,147 $ 2,589,017 $ 74,419,789 $ 94,303,953Net increase in fair value of

investments 178,410,172 263,463 6,524,441 185,198,076 209,767,693Investment-related

expenses (14,717,379) (21,187) (560,401) (15,298,967) (15,782,429)

Net investment income 235,419,418 346,423 8,553,057 244,318,898 288,289,217

Securities lending income:Income 1,872,353 2,720 67,605 1,942,678 1,666,383

Net gain on collateral pool 383,391 557 13,843 397,791 1,429,056

Net securities lendingincome 2,255,744 3,277 81,448 2,340,469 3,095,439

Contributions:Employer - 29,550 19,244,806 19,274,356 19,633,772Employee 42,114 - 9,170,876 9,212,990 8,603,082

Foundations (Note 2) 18,300,000 - - 18,300,000 18,300,000

Total contributions 18,342,114 29,550 28,415,682 46,787,346 46,536,854

Transfer from Component II toComponent I (Note 9) - - - - 20,000,000

Other income 1,469,201 1,389 55,354 1,525,944 1,500,667

Total additions - Net 257,486,477 380,639 37,105,541 294,972,657 359,422,177

DeductionsRetirees' pension and annuity

benefits 288,443,573 62,801 345,297 288,851,671 286,867,526Member refunds and

withdrawals 19,947,151 - 216,264 20,163,415 19,518,004Transfer to Component I from

Component II (Note 9) - - - - 20,000,000General and administrative

expenses 4,933,926 - 1,928,614 6,862,540 7,081,690

Total deductions 313,324,650 62,801 2,490,175 315,877,626 333,467,220

Net (Decrease) Increase in NetPosition Held in Trust (55,838,173) 317,838 34,615,366 (20,904,969) 25,954,957

Net Position Restricted forPensions - Beginning of year 2,922,141,978 4,320,625 93,356,020 3,019,818,623 2,993,863,666

Net Position Restricted forPensions - End of year $ 2,866,303,805 $ 4,638,463 $ 127,971,386 $ 2,998,913,654 $ 3,019,818,623

See notes to financial statements. 11


Notes to Financial Statements

June 30, 2018

Note 1 - Significant Accounting Policies

Reporting Entity

The City of Detroit, Michigan (the "City") sponsors the Police and Fire Retirement System of the City ofDetroit (the "System"), which consists of two single-employer retirement plans, as described below.

Component II

This is the legacy plan (the "Legacy Plan"), which represents the original defined benefit plan, and whichincludes a defined benefit component and a defined contribution component. Component II generallyapplies to benefits accrued by members prior to July 1, 2014. On June 30, 2014, as a result ofnegotiations between the City and the public employee unions, the existing plan benefit formulas werefrozen, and no new employees were allowed to earn benefits under the existing plan. The emergencymanager issued Order No. 29 (Police and Fire Retirement System of the City of Detroit) on June 30, 2014,which put these changes into effect. Except as specifically provided in the Combined Plan, benefitsprovided under Component II are frozen effective June 30, 2014.

Component I

As of July 1, 2014, all current and future employees participate in the new hybrid pension plan (the "HybridPlan"), or Component I. This hybrid plan includes a defined benefit component and a defined contributioncomponent. Component I of the plan document applies to benefits accrued by members on or after July 1,2014.

Active city employees who participate in the current plan will receive the benefits they have earned underthe System through June 30, 2014 plus an additional benefit under the new hybrid plan formula, assumingall vesting requirements are met.

The Combined Plan is a separate and independent trust qualified under applicable provisions of theInternal Revenue Code; it is an independent entity (separate and distinct from the employer/plan sponsor),as required by (1) state law and (2) Internal Revenue Code provisions setting forth qualified plan status.The trustees of the plan have a fiduciary obligation and legal liability for any violations of fiduciary duties asindependent trustees. The Combined Plan provides retirement, disability, and survivor benefits to planmembers and beneficiaries.

The financial statements for fiscal year 2018 represent the Legacy Plan, or "Component II," as well as thenew Hybrid Plan, or "Component I." Component II also includes the Income Stabilization Fund. The fund,which is part of Component II only and established as a special plan of adjustment provision, wasestablished for the sole purpose of paying the Income Stabilization Benefits and Income StabilizationBenefits Plus to eligible pensioners. Any funds received by the System that are designated by the City asUTGO Bond Tax Proceeds or a contribution to the Income Stabilization Fund are credited to the IncomeStabilization Fund, as defined in the State Contribution Agreement, which is an exhibit to the Plan ofAdjustment. After 2022, the Investment Committee may recommend to the board of trustees (the "Board")that a portion or all of the assets that exceed income stabilization benefits (including Income StabilizationBenefits Plus) to be paid in the future be used to fund regular pension payments.

The financial statements for the System are also reported in the financial statements of the City of Detroit,Michigan as a pension trust fund. The assets of the pension trust funds include no securities of or loans tothe City or other related parties.

These financial statements include comparative columns for 2017. Such information is not meant to be acomplete presentation in conformity with accounting principles generally accepted in the United States ofAmerica. Accordingly, such information should be read in conjunction with the System's financialstatements for the year ended June 30, 2017.

12



June 30, 2018

Note 1 - Significant Accounting Policies (Continued)

Plan Sponsor Financial Condition - Impact on the System

In the past, the City of Detroit, Michigan (the "plan sponsor") had experienced significant financial difficultyand liquidity concerns. As of June 2013, the City had defaulted on approximately $71 million of pensioncontributions due to the System. During fiscal year 2014, the City did not pay any employer contributionsinto the System, despite the fact that there were actuarially required contributions.

In February 2013, the governor appointed a financial review team, which determined that a localgovernment financial emergency existed in the City. This culminated in bankruptcy proceedings, which theCity initiated in July 2013. Part of the federal court's ruling in December 2013 indicated that the bankruptcystatus usurped whatever protections may be offered to governmental pensions under the MichiganConstitution. On December 10, 2014, the City exited from bankruptcy though confirmation of the EighthAmended Plan for the Adjustment of Debts of the City of Detroit (the "POA"). The POA specifies certainprovisions pertinent to the Legacy and Hybrid plans, including contributions and benefits.

In fiscal year 2018, the contributions that were received by the System were made in accordance with theprovisions of the POA. See Note 10 for significant changes that were implemented by the System underthe POA.

Summary of Significant Accounting Policies

The following is a summary of the significant accounting policies used by the Police and Fire RetirementSystem of the City of Detroit.

Accounting and Reporting Principles

The System follows accounting principles generally accepted in the United States of America (GAAP) asapplicable to governmental units. Accounting and financial reporting pronouncements are promulgated bythe Governmental Accounting Standards Board.

Basis of Accounting

The System uses the economic resources measurement focus and the full accrual basis of accounting.Revenue is recorded when earned and expenses are recorded when a liability is incurred, regardless ofthe timing of related cash flows. Plan member contributions are recognized in the period in which thecontributions are due. Employer contributions are recognized when due pursuant to legal requirements.Benefits and refunds are recognized when due and payable in accordance with the terms of the plan.

Specific Balances and Transactions

Cash and Cash Equivalents

The System considers cash on hand, demand deposits, and short-term investments with an originalmaturity of three months or less when purchased to be cash equivalents.

Investments

Investments are reported at fair value or estimated fair value. Short-term investments are reported at cost,which approximates fair value. Securities traded on a national or international exchange are valued at thelast reported sales price at current exchange rates. Mortgages are valued on the basis of future principaland interest payments. The fair value of real estate investments is based on periodic appraisals, as wellas the judgment of independent real estate advisors and management. Investments that do not have anestablished market value are reported at estimated fair value as determined by the System'smanagement.

Approximately $61,000,000 or 2 percent of the System's net position as of June 30, 2018 does not have areadily determinable market value and has been estimated by management.

13



June 30, 2018


Investments for which market quotations are readily available are generally priced by the custodian usingnationally recognized pricing services and practices. For investments that do not have readily observablemarket prices, including, but not limited to, private equity, public and private real estate, alternatives, anddirect loans, management’s estimate of their fair value is based on information provided by investmentmanagers, general partners, real estate advisors, and other means. These sources are held to a standardof reasonable care in verifying that the valuations presented reasonably reflect the underlying fair value ofthe investments. A variety of factors is considered in the valuation process, including the nature of theinvestment, local market conditions, trading values on public exchanges for comparable investments, andcurrent and projected operating performance. However, due to the inherent uncertainty and the degree ofjudgment involved in determining fair value for such investments, the values reflected in the financialstatements may differ significantly from values that would have been used had a readily determinablemarket value for the investments existed, and the difference could be material.

Contributions Receivable

At June 30, 2018, there was $4,220,826 in employer contributions receivable. This amount relates to fiscalyear 2018 Component I contributions and was paid in July 2018.

As a result of the Plan of Adjustment, payments on the UTGO Stub Bonds were assigned to the IncomeStabilization Fund of Component II of the System. The City was to remit payments on the UTGO StubBonds to the System through 2028. In fiscal year 2017, the City of Detroit, Michigan refunded all of itsoutstanding UTGO Stub Bonds. Upon refunding, the payments to the System were accelerated withapproximately $2.5 million received by the System in fiscal year 2017.

The remaining balance owed to the System, excluding interest, was $598,809. This amount, which hadbeen recognized as part of employer contributions during June 30, 2017, was remitted by an escrow agentto the System during the year ended June 30, 2018.

Receivable/Payable from Investment Sales/Purchases

The System liquidated investments prior to year end and reported a receivable from investment sales atJune 30, 2018 in the amount of $89,025,230. The proceeds from the sales were received subsequent toyear end. In addition, the System purchased investments prior to year end and reported a payable frominvestment purchases at June 30, 2018 in the amount of $96,150,885. This amount was paid subsequentto year end.

Notes Receivable from Participants

In Component II (Legacy), any active, terminated, or retired police and fire employee who is or has been aparticipant in the 1973 defined contribution plan (annuity savings fund) may be eligible for the employeeloan program. The minimum amount of the loan was established at $1,000. The maximum loan is thelesser of 50 percent of the member's account balance in the annuity saving fund or $10,000. Memberscan borrow as either a general purpose loan payable in one to five years or a residential loan payable in 1to 15 years. A member can have only two outstanding loans. The balance of these loans for the yearended June 30, 2018 was $6,360,470. The balance is measured at the unpaid principal balance plus anyaccrued but unpaid interest. Participant notes receivable are written off when deemed uncollectible.

Although Component I (Hybrid) allows participant loans, there are none outstanding at June 30, 2018.

Capital Assets

Capital assets for the System include software, office equipment, and furniture. Depreciation expense iscalculated by allocating the net cost of the assets over their estimated useful lives.

14



June 30, 2018


Use of Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in theUnites States of America requires management to make estimates and assumptions that affect thereported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date ofthe financial statements and the reported amounts of additions and deductions during the reporting period.Actual results could differ from those estimates.

Note 2 - Pension Plan Description

Component II (Legacy Plan) and Component I (Hybrid Plan)

Plan Administration

The System's governance was modified in December 2014 as part of the City's bankruptcy plan. TheSystem's board of trustees and Investment Committee administer the Police and Fire Retirement Systemof the City of Detroit Pension Plan, a single-employer defined benefit and defined contribution plan thatprovides retirement benefits, as well as survivor and disability benefits, for plan members andbeneficiaries. Plan members include active employees, retirees, and beneficiaries from variousdepartments within the City of Detroit, Michigan. Benefit terms have been established by contractualagreements between the System and the employees' collective bargaining unit, as modified by the POA.Future amendments are subject to the same process. However, pursuant to the POA, pension benefitterms presently expressed in the System are not subject to amendment before June 30, 2023, unless anamendment is required to maintain the tax-qualified status of the System. The obligation to contribute toand maintain the System was established by the City Charter and negotiations with the employees'collective bargaining units.

The board of trustees is composed of 17 seats, occupied by 15 members as of June 30, 2018. Sixmembers of the Board are elected by the active membership to serve three-year terms. Expirations ofterms of elected trustees are staggered. Two retired members are elected by the retired membership andserve three-year terms. Eight members serve ex-officio, these members being the mayor of the City ofDetroit, Michigan (or designee), the city treasurer (or deputy treasurer), one representative from theDetroit City Council, the Corporation Counsel (or designee), the finance director (or designee), the budgetdirector (or designee), and two ex-officio trustees to be appointed by the mayor.

The Investment Committee has five independent members appointed to initial terms with staggeredexpirations, which terms will all eventually become six years. Two additional members, two activemembers, and two retired members serve on the Investment Committee based on appointment by theboard. The Investment Committee will be in place through at least December 2034.

Benefits Provided

The System provides retirement, disability, and death benefits. Benefit terms had been established bynegotiations between the City Council and the employees' collective bargaining unit and subject toamendment by the City Council. Further changes to benefits were provided for under the POA.

15



June 30, 2018

Note 2 - Pension Plan Description (Continued)

Employees Covered by Benefit Terms

The following members were covered by the benefit terms:

Component II(Legacy Plan)

Component I(Hybrid Plan)

Date of member count June 30, 2017 June 30, 2017

Inactive plan members or beneficiaries currently receiving benefits 8,187 64Inactive plan members entitled to but not yet receiving benefits 424 465Active plan members (includes DROP members of 683 for Component

II and 84 for Component I) 2,597 2,604

Total employees covered by the plan 11,208 3,133

As of June 30, 2014, Component II has been frozen. As of that date, no new participants were allowed toenter the plan and no new benefit accruals were allowed for existing participants.

After July 1, 2014, active members will retain existing service credit in the Legacy Plan, but will only earnexisting service credit in the new Hybrid Plan.

Contributions

Article 9, Section 24 of the State of Michigan Constitution requires that financial benefits arising onaccount of employee service rendered in each year be funded during that year. Accordingly, in the past,the System had retained an independent actuary to determine the annual contribution. The actuariallydetermined rate was the estimated amount necessary to finance the costs of benefits earned by planmembers during the year, with an additional amount to finance any unfunded accrued liability. However,until 2024, contributions are based on specific provisions in accordance with the Plan of Adjustment.

The City filed for bankruptcy in 2013, and, on November 12, 2014, the United States Bankruptcy Court forthe Eastern District of Michigan entered an order confirming the Eighth Amended Plan for the Adjustmentof Debts of the City of Detroit. Going forward, the obligation for the City to contribute to the System will bedetermined by the provisions in the Eighth Amended Plan for the Adjustment of Debts of the City ofDetroit. See Note 10 for further information.

Employer Contributions

Component II

For Component II, during fiscal year 2018, employer contributions are not actuarially determined butdetermined by the provisions of the POA detailed under Exhibit II.B.3.q.ii.A of the POA. For fiscal year2018, contributions were from the Foundation for Detroit's Future (the "Foundation") in the amount of$18.3 million. Going forward, no more employer contributions will be made towards Component II until2024, other than those that will continue to be made from proceeds of the Foundation's contributions, asspecified in the POA, assuming all requirements are met.

Component I

For Component I, during fiscal year 2018, employer contributions are not actuarially determined, but aredetermined by the provisions of the Combined Plan detailed under Section 9.3 of Component I. PerSection 9.3, commencing on July 1, 2014 and ending June 30, 2023, the City is required to contribute 11.2percent, 12.25 percent of base compensation of active members, depending on bargaining unit. Thesecontribution rates are fixed by the POA through June 30, 2023. During fiscal year 2018, the Citycontributed $19,244,806 into the Hybrid Plan. Beginning in 2024, the employer contributions will beactuarially determined based on the amount necessary to fund the plan on an actuarial basis.

16



June 30, 2018

Note 2 - Pension Plan Description (Continued)

Because there were no actuarially determined contributions for Component I, there is no requiredschedule of the City's contributions included within these financial statements.

Employee Contributions

Component II

Contribution requirements of plan members were historically established and amended by the board oftrustees in accordance with the City Charter, union contracts, and plan provisions. For the year endedJune 30, 2018, there were minimal employee contributions into Component II related to repayment of priorrefunded contributions, as the plan was frozen as of June 30, 2014.

Component I

Contribution requirements of plan members are established by the Combined Plan. For the year endedJune 30, 2018, active member contribution rate for employees hired before July 1, 2014 was 6 percent ofannual pay and was 8 percent of annual pay for employees hired after July 1, 2014. During fiscal year2018, the plan received mandatory and voluntary employee contributions of $9,170,876.

Deferred Retirement Option Program (DROP)

In lieu of terminating employment and accepting a retirement allowance under the plan, any member ofthe System who is eligible for the DROP program may defer the receipt of his or her retirement allowance,continue services, and be paid compensation. At the time of the DROP election, the member no longeraccrues a benefit. The program credits the employee for benefit payments that would have been paid hadhe or she retired normally by depositing 75 percent of the monthly payment with a third-party administratorin the member's name. The remaining 25 percent of the monthly payments are retained by the System forgeneral purposes. The DROP allocations continue if the member continues to be actively employed as apolice officer or a firefighter with the City. The member is eligible to withdraw the amounts deposited withthe third-party administrator upon retirement. In addition, upon retirement, the retiree receives 100 percentof his or her retirement benefits. There are no amounts held by the System at June 30, 2018 as allamounts due to the members pursuant to the DROP election are held by a third-party administrator.

Note 3 - Deposits and Investments

The System is authorized by Michigan Public Act 314 of 1965, as amended, to invest in certain reverserepurchase agreements, stocks, diversified investment companies, annuity investment contracts, realestate leased to public entities, mortgages, real estate, debt or equity of certain small businesses, certainstate and local government obligations, and certain other specified investment vehicles.

The investment policy adopted by the Board is in accordance with Public Act 196 of 1997 and hasauthorized investments according to Michigan Public Act 314 of 1965, as amended. The System’sdeposits and investment policies are in accordance with statutory authority.

The System invests in various investment securities. Investment securities are exposed to various risks,such as interest rate, market, credit risks, and overall market volatility. Due to the level of risk associatedwith certain investment securities, it is at least reasonably possible that changes in the values ofinvestment securities will occur in the near term and such changes could materially affect the amountsreported on the statement of changes in fiduciary net position.

17



June 30, 2018

Note 3 - Deposits and Investments (Continued)

The System's cash and investments are subject to several types of risk, which are examined in moredetail below:

Custodial Credit Risk of Bank Deposits

Custodial credit risk is the risk that, in the event of a bank failure, the System's deposits may not bereturned to it. The System does not have a deposit policy for custodial credit risk. Approximately $2.6million of the System's checking account balances was uninsured and uncollateralized at June 30, 2018.The System believes that, due to the dollar amounts of cash deposits and the limits of FDIC insurance, itis impractical to insure all deposits. As a result, the System evaluates each financial institution with whichit deposits funds and assesses the level of risk of each institution; only those institutions with anacceptable estimated risk level are used as depositories.

Interest Rate Risk

Interest rate risk is the risk that the value of investments will decrease as a result of a rise in interest rates.The System's investment policy does not restrict investment maturities.

At year end, the average maturities of debt investments were as follows:

Investment TypeFair Value

(in thousands)Less Than 1

Year 1-5 Years 6-10 YearsMore Than 10

Years

U.S. government $ 10,177 $ 10,177 $ - $ - $ -Convertible bonds 51,757 5,488 25,583 6,176 14,510Domestic fixed income 416,137 14,963 108,511 115,512 177,151International fixed income 47,000 3,082 19,652 17,456 6,810

Total $ 525,071 $ 33,710 $ 153,746 $ 139,144 $ 198,471

* Not all fixed-income securities are subject to interest rate risk.

Credit Risk

State law limits investments in commercial paper to the top two ratings issued by nationally recognizedstatistical rating organizations. The System has no investment policy that would further limit its investmentchoices.

At June 30, 2018, the credit quality ratings of debt securities (other than the U.S. government), as rated byS&P, are as follows:

Investment Type and Fair Value(in thousands) AAA AA A BBB BB B

Lower thanB NR

Convertible bonds $ - $ - $ 8,380 $ 20,192 $ 4,634 $ 697 $ - $ 17,852Domestic fixed income 19,603 185,627 26,333 78,534 38,376 33,717 5,891 34,467International fixed income - 2,417 12,287 14,462 6,344 7,399 - 3,747

Total $ 19,603 $ 188,044 $ 47,000 $ 113,188 $ 49,354 $ 41,813 $ 5,891 $ 56,066

Foreign Currency Risk

Foreign currency risk is the risk that an investment denominated in the currency of a foreign country couldreduce its U.S. dollar value as a result of changes in foreign currency exchange rates. The System doesnot restrict the amount of investments in foreign currency.

18



June 30, 2018


The following securities are subject to foreign currency risk:

Currency Equity Fixed Income Cash

ForwardContracts(Including

Receivable/Payable)

Net Investment(Payable)

Receivable

Australian dollar 14,396 $ - $ 15 $ 381 $ (272)Brazil real 462 - 2 - -Canadian dollar 12,346 - 32 6,745 -Danish krone 196 - 57 1,809 -Euro currency unit 84,551 179 729 (7,579) (26)Hong Kong dollar 27,767 - 31 (4,970) (86)Indian rupee 845 - - - -Israeli shekel - - 5 654 -Japanese yen 72,083 - 247 (10,297) (595)Mexican peso 234 2,558 - - -New Taiwan dollar 1,315 - - - -Norwegian krone 970 - 6 818 (206)Pound sterling 34,634 - 17 3,701 77Singapore dollar 290 - 8 1,280 -South African rand - - 1 - -South Korean won 3,865 - 7 961 -Swedish krona 5,123 - 604 2,956 -Swiss franc 14,241 - 1,034 1,625 199Thailand baht 273 - - - -Turkish lira 613 - - - -Uruguayan peso - 98 - - -

Total 274,204 $ 2,835 $ 2,795 $ (1,916) $ (909)

Securities Lending

As permitted by state statutes and under the provisions of a Securities Lending Authorization Agreement,the System lends securities to broker-dealers and banks for collateral that will be returned for the samesecurities in the future. The System's custodial bank manages the securities lending program andreceives cash, government securities, or irrevocable bank letters of credit as collateral. The custodial bankdoes not have the ability to pledge or sell collateral securities unless the borrower defaults. Borrowers arerequired to deliver collateral for each loan equal to not less than 102 percent of the market value of theloaned securities.

As of June 30, 2018, the collateral provided was 102.65 percent of the market value of the loanedsecurities, which is in excess of the required 102 percent.

The System did not impose any restrictions during the fiscal year on the amount of loans made on itsbehalf by the custodial bank. There were no failures by any borrowers to return loaned securities or paydistributions thereon during the fiscal year. Moreover, there were no losses during the fiscal year resultingfrom a default of the borrowers or custodial bank.

The System and the borrower maintain the right to terminate all securities lending transactions ondemand. The cash collateral received on each loan was invested, together with the cash collateral of otherlenders, in an investment pool. The average duration of such investment pool as of June 30, 2018 was 25days. Because the loans are terminable on demand, their duration did not generally match the duration ofthe investments made with cash collateral. On June 30, 2018, the System had no credit risk exposure toborrowers. The collateral held (at cost) and the fair market value of the underlying securities on loans forthe System as of June 30, 2018 were $242,135,379 and $235,892,052, respectively.

19



June 30, 2018


The following represents the balances relating to the securities lending transactions as of June 30, 2018;investments are reported at fair value:

Securities LentUnderlyingSecurities

U.S. corporate fixed income $ 29,457,017U.S. equities 166,869,149Non-U.S. equities 8,139,501U.S. governments 31,426,385

Total $ 235,892,052

The fair market value of the collateral pool related to securities lending at June 30, 2018 was$244,741,253. The investments were in asset-backed securities, time deposits, floating rate notes, andrepurchase agreements. Approximately 80 percent of these securities had a duration of less than oneyear, 17 percent had a duration between one and three years, and 3 percent had a duration over 15 years.

The credit ratings of the securities lending collateral pool held at June 30, 2018, as rated by S&P, are asfollows:

Ratings Amount

AAA $ 20,373,904AA 68,780,125A 105,462,058CC 5,793,319CCC 1,090,169NR 43,241,678

Total $ 244,741,253

Note 4 - Fair Value Measurements

In accordance with GASB Statement No. 72, Fair Value Measurement and Application, the notes to thefinancial statements now include enhanced disclosures about fair value measurement, the level of fairvalue hierarchy, and valuation techniques.

The System categorizes its fair value measurements within the fair value hierarchy established bygenerally accepted accounting principles. The hierarchy is based on the valuation inputs used to measurethe fair value of the asset. Level 1 inputs are quoted prices in active markets for identical assets; Level 2inputs are significant other observable inputs; Level 3 inputs are significant unobservable inputs.Investments that are measured at fair value using the net asset value per share (or its equivalent) as apractical expedient are not classified in the fair value hierarchy below.

In instances whereby inputs used to measure fair value fall into different levels in the fair value hierarchy,fair value measurements in their entirety are categorized based on the lowest level input that is significantto the valuation. The System’s assessment of the significance of particular inputs to these fair valuemeasurements requires judgment and considers factors specific to each asset.

20



June 30, 2018

Note 4 - Fair Value Measurements (Continued)

The System has the following recurring fair value measurements as of June 30, 2018:

Assets Measured at Fair Value on a Recurring Basis at June 30, 2018

Quoted Prices inActive Markets

for IdenticalAssets

(Level 1)

Significant OtherObservable

Inputs(Level 2)

SignificantUnobservable

Inputs(Level 3)

Balance atJune 30, 2018

Debt securities:Government securities (U.S.

and other) $ 76,628,652 $ 14,276,247 $ - $ 90,904,899U.S. government mortgage-

backed securities - 98,256,075 - 98,256,075Corporate bonds - 310,045,863 - 310,045,863Privately negotiated debt - - 6,402,140 6,402,140Corporate floating rate notes - 177,642,628 - 177,642,628Asset backed securities - 25,190,312 - 25,190,312

Total debt securities 76,628,652 625,411,125 6,402,140 708,441,917

Equity securities:Common stock 1,184,984,633 - - 1,184,984,633Preferred stock 8,546,144 3,422,282 - 11,968,426

Total equity securities 1,193,530,777 3,422,282 - 1,196,953,059

Private equity funds - - 4,000,000 4,000,000Partnership investments - - 2,760,000 2,760,000Real estate private equity funds - - 11,770,000 11,770,000Real estate related investments - - 36,075,341 36,075,341

Total $ 1,270,159,429 $ 628,833,407 $ 61,007,481 1,960,000,317

Investments measured at NAV:International equity fund 256,934,359Fixed-income funds 110,140,074Global equity funds 156,694,358Hedge funds 177,523,808Real estate funds 307,496,939Private equity funds 152,805,876

Total investmentsmeasured at NAV 1,161,595,414

Total investmentsmeasured at fair value $ 3,121,595,731

A total of $41,908,314 of repurchase agreements that are recorded at amortized cost are not included inthe fair value table above.

Debt and equity securities classified in Level 1 are valued using prices quoted in active markets for thosesecurities.

The fair value of preferred stock and debt securities at June 30, 2018 was determined primarily based onLevel 2 inputs. The System estimates the fair value of these investments using other inputs, such asinterest rates and yield curves, that are observable at commonly quoted intervals for identical or similarassets.

21



June 30, 2018


The fair value of the remaining investments at June 30, 2018 was determined primarily based on Level 3inputs. The System estimates the fair value of these investments using the System’s own pricing estimatemethodology, pricing models, discounted cash flow methodologies, or similar techniques taking intoaccount the characteristics of the asset.

The valuation method for investments measured at net asset value (NAV) per share (or its equivalent) ispresented in the following table.

Investments in Entities that Calculate Net Asset Value per Share

The System holds shares or interests in investment companies whereby the fair value of the investmentsis measured on a recurring basis using net asset value per share (or its equivalent) of the investmentcompanies as a practical expedient.

As of June 30, 2018, the fair value, unfunded commitments, and redemption rules of those investmentsare as follows:

Fair ValueUnfunded

Commitments

RedemptionFrequency, if

EligibleRedemption

Notice Period

International equity funds $ 256,934,359 $ - Monthly Up to 30 daysFixed-income funds 110,140,074 - Monthly Up to 30 daysGlobal equity funds 156,694,358 - Monthly Up to 30 daysHedge funds 177,523,808 - Annually Up to 100 daysReal estate funds 307,496,939 74,199,087 Quarterly Up to 90 daysPrivate equity funds 152,805,876 232,494,306 N/A N/A

Total investments measuredat NAV $ 1,161,595,414 $ 306,693,393

Multiple funds are held in each category. For reporting purposes, the redemption frequency andredemption notice period provided are the most restrictive of any of the funds in the category.

The international equity funds class includes investments in funds that invest predominantly in equitysecurities of non-U.S. companies. The funds invest in developed and emerging market countries andutilize investments across the capitalization spectrum from large to small companies. The fair values ofthe investments in this class have been estimated using the net asset value per share of the investments.

The fixed-income funds class include investments in funds that invest predominantly in fixed-incomeinstruments in the U.S., developed, and emerging market countries. The funds invest across a diversegroup of security types including government, corporate and mortgage backed debt and across the creditquality spectrum of investment grade and high yield. The fair values of the investments in this class havebeen estimated using net asset value per share of the investments.

The global equity funds include investments in funds that are designed to achieve a return volatilityconsiderably less that the global equity market while providing market-like or above-market returns over afull market cycle. The fair values of the investments in this class have been estimated using net assetvalue per share of the investments.

22



June 30, 2018


The hedge funds class include investments in funds that achieve capital appreciation throughmultimanager and/or multistrategy investments. Within this group of funds, there is exposure toinvestment strategies, including, but not limited to, credit, event-driven, equity, and relative value. Thefunds have the ability to invest across all markets and across all asset classes to implement their variousstrategies. The fair values of the investments in this class have been estimated using net asset value pershare of the investments. Approximately 1 percent of the value of the investments in the hedge fund classabove are in the process of being liquidated by the fund manager. Distributions from each fund will bereceived as the underlying investments of the fund are liquidated. It is estimated that the underlyinginvestments of the fund will be liquidated over the next 18-24 months.

The real estate funds class include investments in funds whose objective is to operate a core portfolio ofreal estate investments predominantly located in the U.S. The funds acquire ownership in underlyinginvestments either through direct real estate ownership or ownership in real estate companies or theequity of real estate investment trusts. The funds predominantly target purchases in office, industrial,retail, or multifamily real estate classes. The fair values of the investments in this class have beenestimated using net asset value per share of the investments (or its equivalents).

The private equity class is an alternative investment class and consists of investments in companies thatare not listed on a public exchange. The Police and Fire Retirement System of the City of Detroitmaintains a diversified portfolio of private equity investments by both style (buyout, turnaround, venturecapital, etc.) and vintage year exposure. With its private equity allocation, the Police and Fire RetirementSystem of the City of Detroit seeks to take advantage of the illiquidity premium associated with theseprivate equity investments. The fair values of the investments in this class have been estimated using netasset value per share of the investments (or its equivalents).

Note 5 - Pension Plan Investments - Policy and Rate of Return

Component II (Legacy Plan) and Component I (Hybrid Plan)

Investment Policy

The assets of Component II and I are commingled and invested together, as allowed by the POA. TheSystem's policy in regard to the allocation of invested assets is established and may be amended bygovernance by a majority vote of its members. It is the policy of the governance to pursue an investmentstrategy that manages risk through the prudent diversification of the portfolio across a broad selection ofdistinct asset classes. The System’s investment policy discourages the use of cash equivalents, except forliquidity purposes, and aims to refrain from dramatically shifting asset class allocations over short timespans. The following was the governance’s adopted asset allocation policy as of June 30, 2018:

Asset Class Target Allocation


Total %100.00

Rate of Return

For the year ended June 30, 2018, the annual money-weighted rate of return on pension planinvestments, net of pension plan investment expense, was 8.2 percent. The money-weighted rate ofreturn expresses investment performance, net of investment expense, adjusted for the changing amountsactually invested.

23



June 30, 2018

Note 6 - Pension Plan Reserves

Component II (Legacy Plan)

In accordance with the Combined Plan for the Police and Fire Retirement System of the City of Detroit,Michigan and state law, the following reserves are required to be set aside within the Component II(Legacy) pension plan:

The annuity reserve fund is an accumulation of transfers that is made from the annuity savings fund whenan employee retires, becomes disabled, or if a surviving spouse elects an annuity rather than a lump-sumpayout of accumulated employee contributions.

The survivors benefit fund accumulates regular interest on funds contributed by members prior to July 1,2014 and from which benefits will be paid, but only to the extent sufficient assets are credited to the fundat the time a claim for benefits is made. In the event there are insufficient assets credited to the survivor’sbenefit fund to pay the benefits, then the benefits will be payable from the pension reserve fund.

The employee reserve (the "Annuity Savings Fund" or ASF) is credited as employee contributions arereceived throughout the year; the System maintains a record of the amount contributed by each employeeand credits interest annually. Eligible active members may elect to withdraw their accumulated (annuity)contributions plus investment earnings. Upon retirement, a member can elect to annuitize or receive alump sum of his or her accumulated contribution and interest earnings. When an employee retires,becomes disabled, or if a surviving spouse elects an annuity rather than a lump-sum payout ofaccumulated employee contributions, the balance is transferred to the annuity reserve fund.

The pension accumulation fund is the fund that will accumulate reserves for the pensions and otherbenefits payable from the contributions made by the City, including various departments thereof, andcertain third parties pursuant to the POA and from which pensions and other benefits will be paid onaccount of members with prior service credit. Contributions to the pension accumulation fund from theeffective date of the POA through fiscal year 2023 shall be made only in the amounts and from thesources identified in the POA.

The pension reserve fund represents funded pension benefits available for retired members and is fundedby actuarially determined transfers from the pension accumulation fund. The transfers from the pensionaccumulation fund to the pension reserve fund for fiscal year 2018 retirements have not yet beendetermined.

The expense fund is the fund that will be credited with all money provided by the City to pay theadministrative expenses of the System and from which all the expenses necessary in connection with theadministration and operation of the System will be paid. At year end, this reserve balance is zero as allemployer contributions were credited to the pension accumulation fund.

The balances of the reserve accounts for Component II (excluding the Income Stabilization Fund) as ofJune 30, 2018 are included in the table below. The reserve balances as of June 30, 2018 shown below donot include the current year transfer amount related to fiscal year 2018 retirements for amounts that aretransferred from the pension accumulation fund to the pension reserve fund.

The balances of the reserve accounts at June 30, 2018 are as follows:

RequiredReserve

AmountFunded

Annuity Savings Fund $ 74,507,520 $ 74,507,520Pension Reserve Fund 2,808,564,734 2,759,167,723Annuity Reserve Fund 29,980,092 29,980,092Survivor Benefit Fund N/A 2,648,470Pension Accumulation Fund N/A -

24



June 30, 2018

Note 6 - Pension Plan Reserves (Continued)

Component I (Hybrid Plan)

In accordance with the Combined Plan for the Police and Fire Retirement System of the City of Detroit andstate law, the following reserves are required to be set aside within the Component I (Hybrid) pensionplan:

The accumulated mandatory employee contribution fund shall be the fund in which shall be accumulatedthe contributions of members to provide their retirement allowances. Upon the retirement, termination, ordeath of a member with a vested retirement allowance, the member’s accumulated mandatory employeecontributions shall be deemed to be part of the pension reserve that shall be used to pay the member’sretirement allowance.

The accumulated voluntary employee contribution fund shall be the fund in which shall be accumulatedthe voluntary after-tax contributions of members together with earnings thereon.

The pension accumulation fund shall be the fund in which shall be accumulated reserves for theretirement allowances and other benefits payable from that portion of the employer’s annual contributionthat is not credited to the rate stabilization fund and amounts transferred to Component I and from whichshall be paid retirement allowances and other benefits on account of members. During fiscal year 2018, allemployer contributions were directed by the City into the pension accumulation fund, and no amountswere credited to the rate stabilization fund.

The rate stabilization fund shall be the fund that shall be credited with the employer's annual contributionsin excess of the amount of the employer’s contribution that is credited to the pension accumulation fundand amounts transferred to Component I, as provided in Section G-2(f) of Component II. See Note 9 fordetails on the transfer provisions related to transfers between Component II and Component I. Duringfiscal year 2018, no amounts were credited to the rate stabilization fund. Therefore, this reserve balance iszero.

The deferred retirement option plan fund shall accumulate the amounts credited to the DROP accounts ofmembers who have elected to participate in the DROP Program pursuant to Article 12, together withearnings thereon, provided that the DROP accounts are held and invested within the System. At year end,the DROP reserve is zero because the System is not holding those assets.

The medical benefit fund shall be the fund that will be credited with contributions made for the purpose offunding medical benefits. During the year, no such contributions were made and, therefore, this reservebalance is zero.

The expense fund shall be the fund to which will be credited any money provided by the employers to paythe administrative expenses of the System, and from which certain expenses incurred in connection withthe administration and operation of the System will be paid. At year end, this reserve balance is zero, asall employer contributions were credited to the pension accumulation fund.

The income fund shall be the fund to which all interest, dividends, and other income derived from theinvestments of Component I of the System will be credited. Transfers from the income fund will be madeto credit earnings and losses to various reserves of the System in accordance with the provisions ofComponent I of the combined plan document. Amounts credited to the income fund in excess of amountsneeded to credit earnings and losses of the System, as provided in Component I for any plan year, shallbe transferred to the pension accumulation fund. During fiscal year 2018, investment income wastransferred to other reserve funds and, therefore, this reserve balance at June 30, 2018 remainsunfunded.

25



June 30, 2018

Note 6 - Pension Plan Reserves (Continued)

The balances of the above reserves for Component I that were funded as of June 30, 2018 are as follows:

RequiredReserve

AmountFunded

Accumulated Mandatory Employee Contribution Fund $ 32,030,640 $ 32,030,640Accumulated Voluntary Employee Contribution Fund 177,741 177,741Pension Accumulation Fund - 95,763,005

Note 7 - Net Pension Liability of the City for Component II (Legacy Plan)

The net pension liability of the City has been measured as of June 30, 2018 and is composed of thefollowing:

Total pension liability $ 3,725,455,416Plan fiduciary net position 2,866,303,805

City's net pension liability $ 859,151,611

Plan fiduciary net position as a percentage of the total pension liability %76.94

Actuarial Assumptions

The total pension liability was determined by an actuarial valuation as of June 30, 2017, which usedupdated procedures to roll forward the estimated liability to June 30, 2018. The valuation used thefollowing actuarial assumptions applied to all periods included in the measurement:

Inflation N/A

Salary increases N/ANo inflation assumption or salary increases due to plan freeze

as of June 30, 2014Investment rate of return 7.19% Net of pension plan investment expense, including inflation

Based on an experience study from 2008-2013 issued in February 2015, the mortality table assumptionwas based on the RP-2014 Blue Collar Annuitant Table for males and females. The tables are projectedto be fully generational, based on the two-dimensional sex-distinct mortality scale MP-2014.

The actuarial assumptions, other than mortality and the investment rate of return, used in the June 30,2017 valuation to calculate the total pension liability as of June 30, 2018 were based on the results of anactuarial experience study for the period from 2002-2007.

Cost of Living Adjustments

For the calculation of the total pension liability, COLA has been limited in accordance with the Plan ofAdjustment to 1.0125 percent.

Attribution Period

As addressed more fully in Note 1, as of June 30, 2014, the plan was frozen such that no new benefitaccruals were allowed and no new members could join. Starting July 1, 2014, the participants in thisLegacy Plan (Component II) will now be earning benefits under a newly created defined benefit plan(Component I). GASB Statement No. 67 requires that the service costs of all pensions be attributedthrough all assumed exit ages, through retirement. Neither GASB Statement No. 67 nor any other GASBstandard has set forth guidance specifically related to frozen plans with successor plans in place. Absentany guidance to the contrary, due to the status as a frozen plan combined with the fact that individuals arenow earning service in a new defined benefit pension plan, the retirement date for the purpose ofattribution was assumed to be June 30, 2014 for all members. Therefore, the total pension liability at June30, 2018 is equal to the present value of projected benefit payments.

26



June 30, 2018

Note 7 - Net Pension Liability of the City for Component II (Legacy Plan)(Continued)

Note that the long-term assumed rates of return used for the purpose of the GASB Statement No. 67valuations were determined in accordance with generally accepted accounting principles. This should notbe confused with the provisions in the Plan of Adjustment, which established a 6.75 percent assumed rateof return for purposes of the various provisions within the plan; the Plan of Adjustment did not attempt todictate the long-term rate of return to be used for accounting purposes.

Discount Rate

The discount rate used to measure the total pension liability as of June 30, 2018 was 7.19 percent;however, the single discount rate used at the beginning of the year was 7.17 percent. The projection ofcash flows used to determine the discount rate assumed that employee contributions will be made at thecurrent contribution rate and that city contributions will be made at rates equal to the difference betweenactuarially determined contribution rates and the employee rate.

Projected Cash Flows

Based on the above assumptions, the pension plan’s fiduciary net position was projected to be available tomake all projected future benefit payments of current active and inactive employees both at the beginningof the year and at the end of the year. Therefore, the long-term expected rate of return on pension planinvestments was applied to all periods of projected benefit payments to determine the total pensionliability. The projection of cash flows used to determine the discount rate assumed that employeecontributions will be made at the current contribution rate. Contributions to the System are projected to beat the minimum amounts required by the Plan of Adjustment through 2023, followed by actuariallydetermined contributions beginning in 2024. While no funding policy has been adopted by the City ofDetroit, Michigan, the projection of cash flows assumes full funding of contributions such that the plan'snet position will be sufficient to make all benefit payments. The System believes that the funding practiceadopted by the City will be consistent with the underlying objective used in the projection to develop thesingle discount rate.

The long-term expected rate of return on pension plan investments was determined using a building-blockmethod in which best-estimate ranges of expected future real rates of return (expected returns, net ofpension plan investment expense, and inflation) are developed for each major asset class. These rangesare combined to produce the long-term expected rate of return by weighting the expected future real ratesof return by the target asset allocation percentage and by adding expected inflation. Best estimates ofgeometric real rates of return as of June 30, 2018 for each major asset class included in the pensionplan's target asset allocation, as disclosed in the investment note, are summarized in the following table:

Asset Class

Long-termExpected

Real Rate ofReturn


27



June 30, 2018

Note 7 - Net Pension Liability of the City for Component II (Legacy Plan)(Continued)

Sensitivity of the Net Pension Liability to Changes in the Discount Rate

The following presents the net pension liability of the City, calculated using the discount rate of 7.19percent, as well as what the net pension liability would be if it were calculated using a discount rate that is1 percentage point lower (6.19 percent) or 1 percentage point higher (8.19 percent) than the current rate:

1 PercentDecrease(6.19%)

CurrentDiscount Rate

(7.19%)

1 PercentIncrease(8.19%)

Net pension liability of the City $ 1,240,086,907 $ 859,151,611 $ 538,954,870

Note 8 - Net Pension Asset of the City for Component I (Hybrid Plan)

The net pension asset of the City has been measured as of June 30, 2018 based on benefits in force as ofthat date and is composed of the following:

Total pension liability $ 94,784,240Plan fiduciary net position 127,971,386

City's net pension asset $ (33,187,146)

Plan fiduciary net position as a percentage of the total pension liability %135.01

Actuarial Assumptions

The total pension liability was determined by an actuarial valuation as of June 30, 2017, which usedupdated procedures to roll forward the estimated liability to June 30, 2018. The following are the significantassumptions:

Wage inflation assumption was 2 percent for five years, 2.5 percent for the next five years, and 3 percentthereafter.

The investment rate of return (net of pension plan investment expense, including inflation) applied to thebeginning of year total pension liability was 7.17 percent as compared to 7.19 percent, which was theassumed long-term rate of return as of the end of year. The rates were determined in accordance withgenerally accepted accounting principles. This should not be confused with the provisions in the Plan ofAdjustment, which established a 6.75 percent assumed rate of return for purposes of the variousprovisions within the plan; the Plan of Adjustment did not attempt to dictate the long-term rate of return tobe used for accounting purposes.

Based on an experience study from 2008-2013 issued in February 2015, the mortality table assumptionwas based on the RP-2014 Blue Collar Annuitant Table for males and females. The tables are projectedto be fully generational, based on the two-dimensional sex-distinct mortality scale MP-2014.

Cost of living adjustments: This plan has a postretirement COLA feature known as the Variable PensionImprovement Factor (VPIF) of a 1 percent compound COLA. It can be granted beginning on July 1, 2015only if the five-year projection shows the plan's funded status above 90 percent based upon 6.75 percentfuture investment return. For the purpose of the total pension liability, the actuary assumed a 0.50 percentcompound COLA beginning July 1, 2018 to model the potential average COLA over time. Had no COLAbeen assumed, the net pension asset would have been $(37,952,246). Had the full 1 percent COLA beenassumed, the net pension asset would have been $(27,988,603).

There were no changes in benefit provisions during the year affecting the total pension liability.

28



June 30, 2018

Note 8 - Net Pension Asset of the City for Component I (Hybrid Plan) (Continued)

Discount Rate

The discount rate used to measure the total pension liability as of June 30, 2018 was 7.19 percent;however, the single discount rate used at the beginning of the year was 7.17 percent. The projection ofcash flows used to determine the discount rate assumed that employee contributions will be made at thecurrent contribution rate and that city contributions will be made at rates equal to the difference betweenactuarially determined contribution rates and the employee rate.

Projected Cash Flows

Based on those assumptions, the pension plan’s fiduciary net position was projected to be available tomake all projected future benefit payments of current active and inactive employees both at the beginningof the year as well as at the end of the year. Therefore, the long-term expected rate of return on pensionplan investments was applied to all periods of projected benefit payments to determine the total pensionliability. The projection of cash flows used to determine the discount rate assumed that employeecontributions will be made at the current contribution rate. Contributions to the System are projected to beat the minimum amounts required by the Plan of Adjustment through 2023, followed by actuariallydetermined contributions beginning in 2024. While no funding policy has been adopted by the City ofDetroit, Michigan, the projection of cash flows assumes full funding of contributions such that the plan'snet position will be sufficient to make all benefit payments. The System believes that the funding practiceadopted by the City will be consistent with the underlying objective used in the projection to develop thesingle discount rate.

The long-term expected rate of return on future pension plan investments is the same as Component IIgiven that the assets are commingled (see Note 7).

Sensitivity of the Net Pension Asset to Changes in the Discount Rate

The following presents the net pension asset of the City, calculated using the discount rate of 7.19percent, as well as what the City's net pension asset would be if it were calculated using a discount ratethat is 1 percentage point lower (6.19 percent) or 1 percentage point higher (8.19 percent) than the currentrate:

1 PercentDecrease(6.19%)

CurrentDiscount Rate

(7.19%)

1 PercentIncrease(8.19%)

Net pension asset of the City $ 15,801,650 $ 33,187,146 $ 47,020,603

Note 9 - Commitments

When the System enters into various investments, it may not completely fund the entire investment at thebeginning. Rather, it enters into commitments to fund remaining capital amounts at certain points in time.At June 30, 2018, the remaining capital funding commitment for the System is approximately $307 million.

29



June 30, 2018

Note 9 - Commitments (Continued)

In addition, the combined plan document setting forth the Legacy Plan (Component II) contains a provisionfor the transfer of certain excess investment returns to the new Hybrid Plan (Component I). In any planyear during the period beginning on or after July 1, 2014 and ending June 30, 2023, if the annual rate ofreturn credited to member annuity savings fund accounts is less than the actual rate of return net ofexpenses of the Plan’s invested assets for the second plan year preceding the plan year in which theannual rate of return is credited, the excess earned shall be transferred to the pension accumulation fundmaintained under Component I of the System and will be used to fund transition costs related toComponent I. The transition cost is a measure of the liability that Component I has at its inception due tothe fact that members in Component I receive vesting and eligibility credit under Component I for servicethat was earned prior to July 1, 2014 and is otherwise credited to members under Component II. Suchtransition costs have been calculated by the System’s actuary. Yearly transfers to fund these costs arerequired in the second year following the year in which the return is earned based on a two-year"lookback"; therefore, for example, any transfers based on the plan year ended June 30, 2015 will becalculated and transferred during the plan year ended June 30, 2018. There were no transfers in fiscalyear 2018.

In the fiscal year ended June 30, 2017, while not required based on the two-year "lookback," the Systemtransferred $20 million from Component II to Component I towards the transition costs.

Note 10 - City of Detroit, Michigan's Chapter 9 Bankruptcy Plan of Adjustment andContinuing Impact on the Plan

In March 2013, after enduring years of financial difficulty, the City of Detroit, Michigan filed for bankruptcyprotection. The Eighth Amended Plan for Adjustment of Debts of the City of Detroit (the “Plan ofAdjustment”) was filed with the Bankruptcy Court on October 22, 2014. In November 2014, after aconfirmation hearing lasting several weeks, the Bankruptcy Court confirmed the Plan of Adjustment(POA), which became effective December 10, 2014.

In fiscal year 2015, the System began implementing the provisions of the POA, which included a 55percent reduction in cost of living adjustments (or "escalators") and a program for income stabilization forcertain of the most vulnerable retirees. Separately, at the start of the 2015 fiscal year, the City through theemergency manager adopted ordinances, which resulted in the freeze of Legacy Plan (Component II) asof June 30, 2014, and the creation of a new Hybrid Plan (Component I) effective July 1, 2014.

The POA also required certain governance changes for the System. Those governance changes includedestablishment of the Investment Committee effective December 10, 2014, which officially marked thebeginning of implementation of the POA, though the System had for several months already undertakencontingency planning for all of the pension adjustments. In addition to governance changes, the POArequires of the System, through its board of trustees and Investment Committee, certain periodic andinterim reporting obligations to the City, the Foundation for Detroit’s Future, and the State of Michigan.Though there were some delays in fiscal year 2017 in meeting certain obligations because of newactuarial reporting requirements for governmental systems, which in turn impacted the preparation of theSystem’s audited financial statements, the System believes it has ultimately met its special reportingobligations in fiscal year 2017, and continued to do so in 2018.

Legacy Plan (Component II)

The Fourth Amended Disclosure Statement (the "Pension Settlement"), as part of the POA, compromisedpension claims and provided funding support for legacy pension benefit obligations under the Police andFire Retirement System of the City of Detroit (DPFRS) Component II from the State of Michigan and theDetroit Institute of Arts.

30



June 30, 2018

Note 10 - City of Detroit, Michigan's Chapter 9 Bankruptcy Plan of Adjustment andContinuing Impact on the Plan (Continued)

For DPFRS, with respect to Component II benefit adjustments, the Pension Settlement (for which benefitlevels were and are contingent on other factors, including receipt of outside contributions) provided for thefollowing:

A 55 percent reduction in cost of living adjustments, or "escalators" (COLAs), paid after July 1, 2014

The possibility of restoration of certain pension benefit cuts, based on a program for the most

financially vulnerable pensioners and beneficiaries through the State of Michigan Treasury Department,

as well as a new feature of Component II allowing restoration depending on the System’s funding level

over time

An Income Stabilization Program (the “ISF Program”) was established as part of the State Contribution

Agreement as another facet of the Pension Settlement. The ISF Program, supported by city funds

arising from an unlimited tax general obligation bonds settlement, is intended to ensure that the most

financially vulnerable retirees and beneficiaries do not fall below the poverty line as a result of

bankruptcy-related pension changes. Beginning on March 1, 2015, certain DPFRS members also

received benefit pension cut restoration under the Income Stabilization Program administered by

DPFRS, pursuant to the State Contribution Agreement, based on eligibility and benefit payments

calculated by the State of Michigan. Following the close of the fiscal year ended June 30, 2016 and

pursuant to Component II of the Combined Plan and the State Contribution Agreement, the System

implemented the first annual ISF Program benefit adjustments effective July 1, 2016.

The POA also discusses a "restoration plan." Terms of the pension restoration are contained in

"Exhibit II.B.3q.ii.C" of the POA, and the terms govern how accrued pensions, including COLA benefits

that were reduced as a part of the POA, may be restored over the 30-year period following the

confirmation order. The Investment Committee will supervise the restoration process in accordance

with the restoration plan. The restoration plan shall be deemed a part of Component II. The funding

levels have not been attained yet as of June 30, 2018 for the restoration process to initiate.

As of March 1, 2015, less than three months after the effective date of the POA, DPFRS successfullyimplemented the vast majority of benefit changes required by the POA, including the ISF Programcoordinated in conjunction with the Michigan Department of Treasury.

Going forward, the obligations for contributions to support Component II of the System through 2023 aredetermined as fixed amounts by the provisions in the POA. Pursuant to the POA, the System is expectedto receive contributions of a total of $260.7 million through fiscal year 2023. The POA calls for the Systemto receive $96 million from the State of Michigan and at least the present value of $164.7 million fromfoundation donors covering fiscal year 2015 through fiscal year 2023, as well as at least the present valueof $50 million over a 10-year period ending in 2034. After 2023, the City will retain responsibility for the fullfunding obligations of Component II of the System, consistent with Michigan law.

In fiscal year 2018, DPFRS received all contributions required by the POA from the foundation donors.

Hybrid Plan (Component I)

In the new Hybrid Plan, effective on July 1, 2014, the following provisions were in place:

Active employees are allowed to make voluntary contributions up to 10 percent of total after-tax pay.

Interest will be credited to those accounts at the actual net investment rate of return for DPFRS, but will

not be lower than 0 percent or more than 5.25 percent.

Employer contributions by the City will be between 11.2 percent and 12.25 percent of base

compensation.

31



June 30, 2018

Note 10 - City of Detroit, Michigan's Chapter 9 Bankruptcy Plan of Adjustment andContinuing Impact on the Plan (Continued)

A variable pension improvement factor of 1.0 percent, which operates similar to an escalator (or

COLA), is available, subject to certain Hybrid Plan (Component I) funding level requirements being

maintained.

DPFRS continues to implement the POA, which includes ongoing compliance and additional reportingrequirements by the Board and the Investment Committee, annual review of benefit levels, and essentiallyprovides for a 40-year plan to close the DPFRS Legacy Component II underfunded liability.

Note 11 - City of Detroit, Michigan Commitment to Future Funding

In anticipation of significant actuarially required contributions commencing in fiscal year 2024, the City,independent of the System, has established a Retiree Protection Trust Fund (the "Trust"). The Trust, apermanent irrevocable trust under Section 115 and 414(d) of the Internal Revenue Code, is to receive,maintain, and invest city funds restricted for future deposits to the General Retirement System Plan andthe Police and Fire Retirement System Plan as part of an effort to manage and stabilize future requiredcity contributions to the plans. The City has set aside $103 million for this Trust as of June 30, 2018 forfuture contributions to the General Retirement System Plan and the Police and Fire Retirement SystemPlan. Contributions to the System will be recognized as the City makes distributions from this independenttrust to the System.

32

Required Supplemental Information

33


Required Supplemental InformationSchedule of Changes in the City's Net Pension Liability and Related Ratios (Legacy Plan)

Last Five Fiscal Years

2018 2017 2016 2015 2014

Total Pension LiabilityService cost $ - $ - $ - $ - $ 34,967,708Interest 257,841,119 261,449,503 264,233,821 306,063,331 304,737,369Changes in benefit terms - - - (555,898,068) (102,236,878)Differences between expected and actual experience 32,674,674 (10,648,606) 45,955,553 (59,621,651) -Changes in assumptions (6,975,457) (4,082,068) 114,463,362 (95,014,469) 540,356,835Benefit payments, including refunds (308,390,724) (306,098,871) (304,467,162) (313,816,916) (323,540,473)

Net Change in Total Pension Liability (24,850,388) (59,380,042) 120,185,574 (718,287,773) 454,284,561

Total Pension Liability - Beginning of year 3,750,305,804 3,809,685,846 3,689,500,272 4,407,788,045 3,953,503,484

Total Pension Liability - End of year $ 3,725,455,416 $ 3,750,305,804 $ 3,809,685,846 $ 3,689,500,272 $ 4,407,788,045

Plan Fiduciary Net PositionContributions - Employer, State, and Foundation $ 18,300,000 $ 18,300,000 $ 37,787,744 $ 114,300,000 $ -Contributions - Employee 42,114 14,055 24,801 593,292 7,783,141Net investment income 237,675,162 282,398,410 24,618,573 122,736,820 568,760,793Administrative expenses (4,933,926) (4,433,656) (3,103,689) (7,630,692) (11,373,226)Benefit payments, including refunds (308,390,724) (306,098,871) (304,467,163) (313,816,916) (323,540,473)Other (includes ASF recoupment) 1,469,201 (18,508,410) 855,743 2,368,638 -

Net Change in Plan Fiduciary Net Position (55,838,173) (28,328,472) (244,283,991) (81,448,858) 241,630,235

Plan Fiduciary Net Position - Beginning of year 2,922,141,978 2,950,470,450 3,194,754,441 3,276,203,299 3,034,573,064

Plan Fiduciary Net Position - End of year $ 2,866,303,805 $ 2,922,141,978 $ 2,950,470,450 $ 3,194,754,441 $ 3,276,203,299

Net Pension Liability - Ending $ 859,151,611 $ 828,163,826 $ 859,215,396 $ 494,745,831 $ 1,131,584,746

Plan Fiduciary Net Position as a Percentage of Total Pension Liability %76.94 %77.92 %77.45 %86.59 %74.33

Covered Payroll* $ 145,936,144 $ 137,250,599 $ 130,510,339 $ 131,220,124 $ 165,552,280

Net Pension Liability as a Percentage of Covered Payroll %588.72 %603.40 %658.35 %377.04 %683.52

GASB Statement No. 67 was implemented June 30, 2014 and does not require retroactive implementation. Data will be added as information is available until 10 years of such information isavailable.

*Covered payroll excludes overtime and longevity pay, which was included as compensation for purposes of determining employer contributions.

34


Required Supplemental InformationSchedule of Investment Returns (Legacy and Hybrid Plans)

Last Five Fiscal Years

Year Ended June 30

2018 2017 2016 2015 2014*

Annual money-weighted rate of return,net of investment expense %8.20 %11.30 %1.30 %3.80 %19.80

*GASB Statement No. 67 was implemented June 30, 2014 and does not require retroactive implementation. Datawill be added as information is available until 10 years of such information is available.

Fiscal years 2014 and 2015 do not include information related to the Hybrid Plan. The Hybrid Plan was effectiveJuly 1, 2014 and for the first year (fiscal year 2015) did not invest in anything other than cash and cashequivalents.

35


Required Supplemental InformationSchedule of City Contributions (Legacy Plan)

Last Ten Fiscal Years

Year Ended June 30

2018*** 2017*** 2016*** 2015*** 2014** 2013** 2012** 2011 2010* 2009*

Actuarially determined contribution $ - $ - $ - $ - $ 50,642,443 $ 42,005,173 $ 49,760,229 $ 81,642,112 $ 57,808,485 $ 61,151,057Contributions in relation to the

actuarially determined contribution - - - - - - 20,733,429 81,642,112 32,808,485 36,151,057

Contribution Deficiency $ - $ - $ - $ - $ (50,642,443) $ (42,005,173) $ (29,026,800) $ - $ (25,000,000) $ (25,000,000)

Covered Payroll $ - $ - $ - $ - $ 165,552,280 $ 186,694,166 $ 205,800,278 $ 220,461,691 $ 228,829,999 $ 231,795,528

Contributions as a Percentage ofCovered Payroll %- %- %- %- %- %- %10.07 %37.03 %14.34 %15.60

* For the years ended June 30, 2010, 2009, and 2008, the System gave various credits to the City that offset the required contributions.

** As of June 30, 2018, a portion of the June 30, 2012 annual required contribution and the entire June 30, 2013 and 2014 annual required contribution has not been paid and has not beenrecognized as revenue.

*** The contributions starting with fiscal year 2015 were determined by the provisions of the POA; the contributions were not actuarially determined and, therefore, not subject to disclosure inaccordance with GASB Statement No. 67 within this schedule.

Notes to Schedule of Pension Contributions (Legacy and Hybrid Plans)

Actuarial valuation information relative to the determination of contributions:

N/A - Starting in fiscal year 2015, contributions are not actuarially determined.

36


Required Supplemental InformationSchedule of Changes in the City's Net Pension Liability (Asset) and Related

Ratios (Hybrid Plan)

Last Four Fiscal Years

2018 2017 2016 2015

Total Pension LiabilityService cost $ 24,811,302 $ 25,414,182 $ 24,068,808 $ 24,835,814Interest 5,787,404 4,474,574 2,743,066 894,089Differences between expected and actual

experience (3,622,053) (10,708,737) (4,077,124) -Changes in assumptions (305,021) (221,533) 2,424,058 (1,008,119)Voluntary employee contributions 96,205 34,134 15,459 14,370Benefit payments, including refunds (561,561) (223,826) (101,251) -

Net Change in Total Pension Liability 26,206,276 18,768,794 25,073,016 24,736,154

Total Pension Liability - Beginning of year 68,577,964 49,809,170 24,736,154 -

Total Pension Liability - End of year $ 94,784,240 $ 68,577,964 $ 49,809,170 $ 24,736,154

Plan Fiduciary Net PositionContributions - Employer $ 19,244,806 $ 16,448,246 $ 15,831,763 $ 14,606,971Mandatory employee contributions 9,074,671 8,554,893 7,958,271 7,390,335Net investment income 8,634,505 8,897,786 252,426 21,019Administrative expenses (1,928,614) (2,648,034) (3,000,369) (685,677)Voluntary employee contributions 96,205 34,134 15,459 14,370Benefit payments (345,297) (137,325) (63,882) (19,554)Refunds (216,264) (86,501) (37,369) -Other income 55,354 20,009,058 - -

Net Change in Plan Fiduciary Net Position 34,615,366 51,072,257 20,956,299 21,327,464

Plan Fiduciary Net Position - Beginning ofyear 93,356,020 42,283,763 21,327,464 -

Plan Fiduciary Net Position - End of year $ 127,971,386 $ 93,356,020 $ 42,283,763 $ 21,327,464

City's Net Pension (Asset) Liability - Ending $ (33,187,146) $ (24,778,056) $ 7,525,407 $ 3,408,690

Plan Fiduciary Net Position as a Percentageof Total Pension Liability %135.01 %136.13 %84.89 %86.22

Covered Payroll $ 145,936,144 $ 137,250,599 $ 130,510,339 $ 121,627,871

City's Net Pension (Asset) Liability as aPercentage of Covered Payroll %(22.74) %(18.05) %5.77 %2.80

37


Notes to Required Supplemental Information Schedules

June 30, 2018

Benefit Changes

Legacy Plan

In 2014, the pension plan was frozen. No new employees are allowed to participate in the plan. All benefits foractives were frozen as of June 30, 2014 based on service and average final compensation accrued as of thatdate.

In 2015, the cost of living adjustments decreased to 1.0125 percent.

Changes in Assumptions

Legacy Plan

In 2014, amounts reported as changes of assumptions resulted from adjustment of the discount rate from 8percent to 7.2 percent and updating the mortality tables from RP-2000 Combined Table to RP-2014 Blue CollarAnnuitant Table.

Legacy and Hybrid Plan

In 2015, amounts reported as changes of assumptions resulted from adjustment of the discount rate from 7.2percent to 7.47 percent.




38

Documents

Police and Fire Retirement System of the City of Detroit · Report on Summarized Comparative Information We have previously audited the Police and Fire Retirement System of the City